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Weekly Fundamentals - Base Metal Prices Slumped on Concerns over Tightening in China Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Sat Dec 09 17 10:08 ET

The selloff in base metals last week was broadly based. While was the worst performer (LME zinc contract for 3-month delivery sank -5.12%), what caught most attention was copper (down -3.83%). Despite recovery after a sharp decline on Tuesday, copper price has continued hovering around the lowest level since October. In our opinion, rising inventory, concerns over tightening in China, as well as seasonal weakness all contributed to the selloff. Indeed, the first and third factors are related. Inventories normally build strongly across the metals markets from December to March (after Lunar New Year). Demand growth would pick up again after the period. For the second factor, there are concerns that the government is draining liquidity from the market. It was reported that PBOC drained a net RMB 510B from money markets this week via open market operations, the largest withdraw since early February. On a positive note, money market rates have remained lower despite the situation.

Oil prices remained under pressure last week. The front-month WTI crude oil contract dropped -1.71% while the Brent contract slid -0.52% last week. Refined oil products were weighed down by stock-builds. While the Nymex heating oil contract slipped -0.64% for the week, the corresponding RBOB gasoline contract was down -1.44%, accumulating about -4% of decline over the past two weeks. Recent price actions have been a result of profit-taking after the OPEC/ non-OPEC meeting on November 30, upside surprise in gasoline stock-build, concerns over the rocket- high oil output and further increase in oil rig counts. Besides the oil-specific factors, greenback's strength added downward pressure to USD-denominated assets.

Natural gas price plummeted last week as inventory unexpectedly rose. The Nymex natural gas for January delivery sank -9.44% last week, mainly contributed by the -5% one-day selloff on Thursday. The EIA reported that gas storage added +2 bcf to 3 695 bcf in the week ended December 1, from 3 693 bcf in the previous week. The market had anticipated a drop of -5 bcf. Stocks were -264 bcf less than the same period last year and -36 bcf below the five-year average of 3 731 bcf. Separately, Baker Hughes reported that the number of gas rigs stayed unchanged at 180 units in the week ended December 8. In terms of drilling types, directional rigs steadied at 71, horizontal rigs stayed added +4 units to 796 and vertical rigs slipped -2 units to 66. Together with the 2-unit increase in oil rigs, the total number of rigs added +2 units to 931 for the week.

US dollar rose against major currencies with the DXY index gaining +1.1% last week. Senate's approval of its version of tax plan, Congress' passage on a spending bill to prevent government from shutting down over the coming two weeks and strong employment data were sending the US dollar higher. Nonfarm payrolls soared +228K in November, beating consensus of a +200K addition and the downwardly revised +244K increase in October. The unemployment rate stayed unchanged at 4.1%. Yet, average hourly wage climbed higher by +0.2% m/m, compared with consensus of +0.3%. On a separate note, University of Michigan sentiment index surprisingly fell to 96.8 in December, from 98.5 a month ago. This has missed market expectations of a rise to 99. The focus for the coming week would turn all the way to the FOMC meeting, at which policymakers would likely decide to raise the Fed funds rate for the third, and the last time, this year. Indications of the monetary policy outlook in the upcoming year would be closely watched.


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